Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates

79 Pages Posted: 20 Mar 2017

See all articles by Massimo Ferrari

Massimo Ferrari

Catholic University of Milan

Jonathan Kearns

Bank for International Settlements (BIS) - Monetary and Economic Department

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department; CREATES - Aarhus University

Multiple version iconThere are 3 versions of this paper

Date Written: March 2017

Abstract

We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower is the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.

Keywords: event study, Exchange Rates, forward guidance, High Frequency Data, Unconventional Monetary Policy

JEL Classification: E52, E58, F31

Suggested Citation

Ferrari, Massimo and Kearns, Jonathan and Schrimpf, Andreas and Schrimpf, Andreas, Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates (March 2017). CEPR Discussion Paper No. DP11918, Available at SSRN: https://ssrn.com/abstract=2937769

Massimo Ferrari (Contact Author)

Catholic University of Milan ( email )

Largo Gemelli 1
Milan, MI Milano 20123
Italy

Jonathan Kearns

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Andreas Schrimpf

CREATES - Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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